• The FSA's Disclosure Regime for Short Positions in Companies Undertaking Rights Issues and Proposed Regime for Contracts for Difference ("CFDs")
  • July 21, 2008 | Authors: Helen Janet Marshall; Peter Anthony Bibby
  • Law Firm: Bingham McCutchen (London) LLP - London Office
  • From 20 June 2008, new provisions were incorporated into the Financial Services Authority's ("FSA") Code of Market Conduct, which have the effect of requiring the disclosure of short positions above a threshold limit (0.25%) in companies which are undertaking rights issues.

    On 2 July 2008, the FSA indicated that it had also decided to implement a new disclosure regime for market participants holding long CFD positions, with a proposed September 2009 date for the new regime to take effect.

    DISCLOSURE OF SHORT POSITIONS

    The FSA has amended the Code of Market Conduct to include a new description of behaviour which will amount to market abuse (misleading behaviour) under section 118 (8)(a) of the Financial Services and Markets Act 2000 (“FSMA”). The new evidential provision, MAR 1.9.2 (A) E, provides that:

    "Failure by a person to give adequate disclosure that he has reached or exceeded a disclosable short position where:

    (1) that position relates, directly or indirectly, to securities which are the subject of a rights issue; and

    (2) the disclosable short position is reached or exceeded during a rights issue period;

    is behaviour which, in the opinion of the FSA, is market abuse (misleading behaviour)."

    Prior to this amendment, there was no expectation of disclosure, although there has, historically, been adverse comment about the market impact that short positions can have. The FSA has, helpfully, confirmed its view that short selling is a legitimate technique which can assist liquidity, but the FSA is concerned to achieve greater transparency. The FSA has published a series of Frequently Asked Questions (“FAQs”) in response to concerns raised about the new regime which clarify the obligations in relation to aggregating interests and netting, and confirm that:

    • The requirements apply to all companies in a rights issue period whose shares are admitted to trading on a prescribed market, irrespective of whether the issuer is incorporated in the UK or not, and irrespective of whether the listing is a primary or secondary listing.
    • Although the FSA has published an initial list of issuers currently in a rights issue period, the FSA has not undertaken to keep the list updated and market participants will therefore have to monitor for themselves whether there are any issuers in which they hold a short position which has entered a rights issue period.
    • Disclosures must include the full name of the person holding the short position, the name of the issuer of the relevant securities, the size of the position as a percentage of the issued share capital and the date that the 0.25% threshold was reached or exceeded.

    Somewhat strangely, there is no obligation to update the initial disclosure, either when the 0.25% threshold is exceeded or where the holding falls below 0.25%, but the FSA has stated that this will be kept under review and that additional requirements may be introduced.

    The imposition of the new requirements by the FSA was, very unusually, effected without consultation, and within a very short timescale. The requirement came into effect just one week after the initial announcement and the new requirements do not appear to have been fully considered by the FSA, with the FAQs having to be amended several times.

    Commentators in the UK have suggested that the changes may have been motivated by a desire on the part of the FSA to stabilise the price of banking sector stock (in particular it is notable that the announcement was made during the HBOS rights issue, and very shortly after the HBOS price had fallen below the offer price in the rights issue).

    The FSA has said that it is also considering whether any further measures are necessary in this area, including restricting the lending of stock in rights issues for the purposes of short selling and restricting short sellers from acquiring rights to the newly issued shares.

    Copies of the FSA’s Press Notice with new Handbook text and the short selling instrument are available at http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/057.shtml, together with the FAQs (version 3) http://www.fsa.gov.uk/pubs/other/Shortselling_faqs.pdf.

    PROPOSED DISCLOSURE REGIME FOR LONG CFD POSITIONS

    The FSA has also confirmed that it will be imposing a disclosure regime for long CFD positions, whereby CFDs and shareholdings will need to be aggregated, with the disclosure threshold being set at 3%. The FSA has indicated that it will publish a detailed policy statement in September 2008, together with draft rules. Final rules will be issued in February 2009 and there will then be a further six months to implement the process and systems changes, with the new rules coming into force in September 2009. The FSA has indicated that, in contrast to the procedure adopted in relation to the short selling requirements, and possibly in an attempt to stem any further criticism, that it will adopt an extensive consultation process with market participants. The FSA will also develop an exemption for CFD writers who act as intermediaries, similar to the Takeover Panels’ Recognised Intermediary exemption, in order to reduce unnecessary disclosures.

    A copy of the FSA’s announcement is available at http://www.fsa.gov.uk/pages/Library/Communication/PR/2008/064.shtml.

    These two developments are reflective of a greater emphasis by the FSA on regulating market behaviour by effecting transparency in the markets, and form part of the FSA’s much-heralded attack on market abuse, which is a key priority for the FSA at present, particularly in the current market conditions.